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International Business 9e By Charles W.L. Hill McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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Presentation on theme: "International Business 9e By Charles W.L. Hill McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved."— Presentation transcript:

1 International Business 9e By Charles W.L. Hill McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Chapter 13 The Strategy of International Business

3 13-3 What Is Strategy?  A firm’s strategy refers to the actions that managers take to attain the goals of the firm  Firms need to pursue strategies that increase profitability and profit growth  Firms can  add value  lower costs  sell more in existing markets  expand internationally

4 13-4 What Is Strategy? Determinants of Enterprise Value

5 13-5 How Is Value Created?  The firm’s value creation is the difference between V and C  a firm has high profits when it creates more value for its customers and does so at a lower cost  Profits can be increased by 1.Using a differentiation strategy 2.Using a low cost strategy  To maximize long run return on invested capital firms pick a viable position on the efficiency frontier, configure internal operations to support that position, have the right organization structure in place to execute the strategy

6 13-6 How Is Value Created? Value Creation

7 13-7 How Are A Firm’s Operations Configured?  A firm’s operations are like a value chain composed of distinct value creation activities  Primary activities  R&D  production  marketing and sales  customer service  Support activities  information systems  logistics  human resources

8 13-8 How Are A Firm’s Operations Configured? The Value Chain

9 13-9 How Can Firms Increase Profits Through International Expansion?  International firms can 1.Expand their market 2.Realize location economies 3.Realize greater cost economies from experience effects 4.Earn a greater return

10 13-10 How Can Firms Leverage Their Products And Competencies?  The success of firms that expand internationally depends on  the goods or services sold  the firm’s core competencies  Core competencies allow firms to reduce the costs of value creation and/or to create perceived value so that premium pricing is possible

11 13-11 Why Are Location Economies Important?  By achieving location economies, firms can  lower the costs of value creation and achieve a low cost position  differentiate their product offering  Firms that take advantage of location economies in different parts of the world, create a global web of value creation activities

12 13-12 Why Are Experience Effects Important?  The experience curve - the systematic reductions in production costs that occur over the life of a product  by moving down the experience curve, firms reduce the cost of creating value  Learning effects - cost savings that come from learning by doing  Economies of scale - the reductions in unit cost achieved by producing a large volume of a product

13 13-13 What Competitive Pressures Exist In The Global Marketplace?  Firms that compete in global markets face two conflicting types of competitive pressures  limit the ability of firms to realize location economies and experience effects, leverage products, and transfer skills within the firm 1.Pressures for cost reductions  force the firm to lower unit costs 2.Pressures to be locally responsive  require the firm to adapt its product to meet local demands in each market, but raise costs

14 13-14 When Are Pressures Greatest?  Pressures for cost reductions are greatest 1.For firms producing products that fill universal needs 2.When major competitors are in low cost locations 3.Where there is persistent excess capacity 4.Where consumers are powerful and face low switching costs  Pressures for local responsiveness arise from 1.Differences in consumer tastes and preferences 2.Differences in traditional practices and infrastructure 3.Differences in distribution channels 4.Host government demands

15 International Business 9e By Charles W.L. Hill McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

16 Chapter 14 The Organization of International Business

17 13-17 What Is Organizational Architecture?  Organizational architecture is the totality of a firm’s organization including 1.Organizational structure 2.Control systems and incentives 3.Processes, organizational culture, and people  To be the most profitable  the elements of the organizational architecture must be internally consistent  the organizational architecture must fit the strategy  the strategy and architecture must be consistent with each other, and consistent with competitive conditions

18 13-18 What Is Organizational Architecture? Organizational Architecture

19 13-19 What Are The Dimensions Of Organizational Structure?  Organizational structure has three dimensions 1.Vertical differentiation - location of decision- making responsibilities within a structure  Centralized decision-making  Decentralized decision-making 2.Horizontal differentiation - formal division of the organization into sub-units 3.Integrating mechanisms - the mechanisms for coordinating sub-units

20 13-20 Why Is Horizontal Differentiation Important?  Initially, most firms have no formal structure, but as they grow, develop a functional structure  Firms may switch to a product divisional structure where each division is responsible for a distinct product line  When firms expand internationally, they often group all of their international activities into an international division

21 13-21 What Is A Functional Structure? A Typical Functional Structure

22 13-22 What Is A Product Divisional Structure? A Typical Product Divisional Structure

23 13-23 What Is An International Divisional Structure? One Company’s International Divisional Structure

24 13-24 What Happens Next?  Firms that continue to expand will move to either a 1.Worldwide product divisional structure - adopted by firms that are reasonably diversified 2.Worldwide area structure - favored by firms with low degree of diversification and a domestic structure based on function 3.The global matrix structure – tries to minimize the limitations of the worldwide area structure and the worldwide product divisional structure

25 13-25 What Is A Worldwide Product Division Structure? A Worldwide Product Divisional Structure

26 13-26 What Is A Worldwide Area Structure? A Worldwide Area Structure

27 13-27 What Is The Global Matrix Structure? A Global Matrix Structure

28 13-28 How Can Subunits Be Integrated?  Regardless of the type of structure, firms need a mechanism to integrate subunits  Many firms use informal integrating mechanisms  a knowledge network  Formal integrating mechanisms include 1.Personal controls 2.Bureaucratic controls 3.Output controls 4.Cultural controls

29 13-29 What Is Organizational Culture?  Organizational culture - the values and norms that employees are encouraged to follow  Evolves from  founders and important leaders  national social culture  the history of the enterprise  decisions that resulted in high performance  Managers in companies with a “strong” culture share a relatively consistent set of values and norms that have a clear impact on the way work is performed

30 13-30 How Can Firms Implement Organizational Change?  For a firm to succeed 1.The firm’s strategy must be consistent with the environment in which the firm operates 2.The firm’s organization architecture must be consistent with its strategy  To implement organization change 1.Unfreeze the organization through shock therapy 2.Move the organization to a new state through proactive change in architecture 3.Refreeze the organization in its new state

31 International Business 9e By Charles W.L. Hill McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

32 Chapter 20 Accounting and Finance in the International Business

33 13-33 What Is Accounting?  Accounting is the language of business  it is the way firms communicate their financial positions  Accounting is more complex for international firms because of differences in accounting standards from country to country  differences make it difficult for investors, creditors, and governments to evaluate firms  It is difficult to compare financial reports from country to country because of national differences in accounting and auditing standards

34 13-34 What Determines National Accounting Standards?  Accounting standards are rules for preparing financial statements  variables influencing accounting systems include  the relationship between business and the providers of capital  political and economic ties  the level of inflation  the level of economic development  the prevailing culture in a country  Auditing standards specify the rules for performing an audit

35 13-35 Why Are International Accounting Standards Important?  The growth of transnational financing and transnational investment has created a need for transnational financial reporting  many companies obtain capital from foreign providers who are demanding greater consistency  Standardization of accounting practices across national borders is probably in the best interests of the world economy  The International Accounting Standards Board (IASB) is a major proponent of standardization of accounting standards

36 13-36 How Does Accounting Influence Control Systems?  The control process in most firms is usually conducted annually and involves three steps 1.Subunit goals are jointly determined by the head office and subunit management 2.The head office monitors subunit performance throughout the year 3.The head office intervenes if the subsidiary fails to achieve its goal, and takes corrective actions if necessary  Budgets and performance data are usually expressed in the corporate currency

37 13-37 What Is Financial Management?  Financial management involves 1.Investment decisions –what to finance 2.Financing decisions –how to finance those decisions 3.Money management decisions –how to manage the firm’s financial resources most efficiently  Decisions are more complex in international business because of different currencies, tax regimes, regulations on capital flows, economic and political risk, etc.

38 13-38 How Do Managers Make Investment Decisions?  Financial managers must quantify the benefits, costs, and risks associated with an investment in a foreign country  To do this, managers use capital budgeting  involves estimating the cash flows associated with the project over time, and then discounting them to determine their net present value  If the net present value of the discounted cash flows is greater than zero, the firm should go ahead with the project

39 13-39 Why Is Capital Budgeting More Difficult For International Firms?  Capital budgeting is more complicated in international business  because a distinction must be made between cash flows to the project and cash flows to the parent company  because of political and economic risk  because the connection between cash flows to the parent and the source of financing must be recognized

40 13-40 How Does Risk Influence Investment Decisions?  Political risk - the likelihood that political forces will cause drastic changes in a country’s business environment that hurt the profit and other goals of a business  higher in countries with social unrest or disorder, or where the nature of the society increases the chance for social unrest  Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that hurt the profit and other goals of a business

41 13-41 How Can Firms Adjust For Political And Economic Risk?  Firms analyzing foreign investment opportunities can adjust for risk 1.By raising the discount rate in countries where political and economic risk is high 2.By lowering future cash flow estimates to account for adverse political or economic changes that could occur in the future

42 13-42 How Do Firms Make Financing Decisions?  Firms must consider two factors 1.How the foreign investment will be financed 2.How the financial structure (debt vs. equity) of the foreign affiliate should be configured  Most experts suggest that firms adopt the structure that minimizes the cost of capital, whatever that may be

43 13-43 What Is Global Money Management?  Money management decisions attempt to manage global cash resources efficiently  Firms need to 1.Minimize cash balances - need cash balances on hand for notes payable and unexpected demands 2.Reduce transaction costs - the cost of exchange  multinational netting

44 13-44 How Can Firms Limit Their Tax Liability?  Every country has its own tax policies  most countries feel they have the right to tax the foreign-earned income of companies based in the country  Double taxation occurs when the income of a foreign subsidiary is taxed by the host-country government and by the home-country government

45 13-45 How Can Firms Limit Their Tax Liability?  Taxes can be minimized through 1.Tax credits - allow the firm to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government 2.Tax treaties - agreement specifying what items of income will be taxed by the authorities of the country where the income is earned 3.Deferral principle - specifies that parent companies are not taxed on foreign source income until they actually receive a dividend 4.Tax havens - countries with a very low, or no, income tax – firms can avoid income taxes by establishing a wholly-owned, non-operating subsidiary in the country

46 13-46 How Do Firms Move Money Across Borders?  Firms can transfer liquid funds across border via 1.Dividend remittances - the most common method of transferring funds from subsidiaries to the parent 2.Royalty payments and fees -the remuneration paid to the owners of technology, patents, or trade names for the use of that technology or the right to manufacture and/or sell products under those patents or trade names

47 13-47 How Do Firms Move Money Across Borders? 3.Transfer prices -the price at which goods and services are transferred between entities within the firm 4.Fronting loans -loans between a parent and its subsidiary channeled through a financial intermediary, usually a large international bank


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